19 Strategic Analysis

1.1 Learning Objectives

1.2 Introduction

1.3 Strategic Analysis

1.3a Industry analysis

1.3b Company analysis

1.3c Matching the internal and external environment indicators

1.  4 Tools for strategic analysis

1.  4a SWOT

1.  4b TOWS

1.  4c Hambrick Model: Strategy Diamond

1.  4d BCG matrix

1.  4e General Electrics Stoplight Matrix

1.  4f Balance score card

1. 5 Summary

1.2 Introduction

Strategic Management is the process of strategic decision-making that sets the long-term direction for the organization. The main objective of strategic management is to achieve sustainable competitive advantage. The steps involved in strategy process are:

A strategy involves various tasks and activities oriented towards organization objectives. The first and the foremost requirement of strategy planning is to define mission of an organization i.e. giving direction to the organization. The same is to intimated to the employees which defines the reason for the existence of organization. Tasks involves in corporate level strategic planning are:

The step of Strategic Analysis in Strategic Management process needs detailed study of both business environment for the development of strategy.

1.3 Strategic Analysis

Strategic analysis is defined by business world dictionary as the process of developing strategy for a business by researching the business and the environment in which it operates1.

There are three steps to strategic analysis

1.    Industry analysis

2.    Company analysis

3.    Matching the two.

1.3 a Industry analysis

Two of the essential determinants of company’s execution are the business environment, in which the company works and the country, in which it is located. Both of these elements are part of organizations outside surroundings. An organization does well in light of the fact that their outside surroundings are greatly attractive. Others do ineffectively in light of the fact that their outside surroundings are hostile. When business environment allows market forces to work freely in those cases some companies make above normal profits. Above normal returns are possible due to imperfect competition – characterized by relatively few competitors, numerous suppliers and buyers, asymmetric information, heterogeneous products, and barriers to entry.

Industry analysis is a special tool that facilitates a company’s complete understanding of position with respect to other companies that manufacture and produce same kind of products and services. Gaining the knowledge about other forces in an industry is an important aspect of effective strategic planning. Industry level analysis gives power to small business enterprises or companies to determine the threats and the opportunities faced by their businesses.

Tools like porters five forces analysis and industry life cycle analysis are used in this stage.

These have been discussed in detail in the earlier lessons.

1.3 b Company analysis

Company analysis or Internal appraisal is examining of internal environment of an organization to assess company’s skills and resources. It identifies the strengths and weaknesses that effect the company’s ability to achieve its goals. Internal appraisal is auditing of internal environment to identify strengths and weaknesses of an organization so as to match and control them to exploit the available opportunities in the industry. It identifies a company’s capabilities and competencies in specific areas as well that can be used to grab the opportunities available in the industry. An organization competency defines the performance of an organization. It is a dynamic and on-going activity. Therefore, internal environment analysis is all about understanding how to use the company’s resources and capabilities to add value.

Analysis of the company’s internal environment requires that the analyst evaluates the firm’s resources and capabilities managers have created. Understanding how to manipulate the company’s resources and capabilities is a key outcome managers look for when analyzing the internal environment.

Therefore, internal environment of a company helps company create value by exploiting core competencies and meeting the standards of global competition. Value is measured by the product’s performance and by its attributes for which customers are willing to pay. It is this value that is the foundation for earning above-average profits. Competitive advantages are often strongly related to the resources firms hold and how they are managed. Resources are the foundation for strategy and these can generate competitive advantages leading to wealth creation when they are bundled together uniquely2.

The common tools for internal environment analysis are value chain analysis, ratio analysis, financial statement analysis etc. These have been discussed in the earlier lessons as well.

1.3 c Matching the internal and external environment indicators.

The last and the most important stage of strategic management is matching the external and internal environment indicators to formulate strategies for above average rate of return and sustained competitive advantage.

1.4 Tools of Strategic analysis

There are multiple tools and frameworks which can be used for strategic analysis. Some of the most common ones are discussed here. It is important to note that it does not mean the tools in stage 1 and 2 are not required.

These are tools which compliment the analysis done in stage 1 and 2 of the process.

1.4 a SWOT

SWOT analysis is a technique that deals with the internal and the external atmosphere of the business of a firm. It uses the simple information of the firm to recognize the bothweaknesses and strengths of the business. It also aids the firm to identify the opportunities that may ascend and the threats which it is probable to face.

Framework of SWOT Analysis

SWOT factors are given below-

Strengths: Those qualities that aid us to achieve the organization’s goal based on its mission and vision. These qualities are necessary for continued along with sustained success. Strengths can be based on resources, capabilities or core competencies of the firms.

Weaknesses: Those qualities which inhibit us from achieving the organization’s goal based on its mission and vision. These qualities weaken the success and growth of the organizational. Weaknesses are the areas where the organization is lacking may be based on its resources, capabilities or core competencies.

Opportunities: Opportunities are result of externalities within which the organization functions. By capitalizing the opportunities in the environment an organisation can plan and implement strategies that allow it to develop into more profitable.

Threats: Threats are result of conditions in external environment which risk the dependability and profitability of the companies . When a threat arises, the stability and sustainability can be at risk.

SWOT Analysis deliver information that helps to match the weaknesses and strengths of an organization i.e. capabilities and resources and with the external competitive environment i.e. threats & opportunities.

1.4 b TOWS Analysis

Rauch (2007)3 said the analysis of SWOT is a usually used tool that scans weaknesses and strengths of a product or service industry from internal atmosphere and presents the threats and opportunities existing in external atmosphere. TOWS analysis is an analysis where the 2 * 2 matrix is used to analyze how strengths can be used to exploit on opportunities and to counter threats. Analysis of TOWS is an active technique of merging strengths present in internal atmosphere with threats and opportunities lying in external surroundings and weaknesses present in internal atmosphere with threats and opportunities lying in external surroundings and to make a strategy.

Based on this 4 categories of strategies are made under TOWS

SO strategies: strategies which are based on strengths of an organization to best utilize or exploit the opportunities which a company faces.

ST strategies: strategies which are based on strengths of an organization to best avoid the threats that a company faces.

WO strategies: To work on weaknesses which nullify or will be bottlenecks in a company exploiting a particularly lucrative opportunity. WT strategies: To work on weaknesses which increase the magnitude of threats that are faced the company.

1.4 c Hambrick Model: Strategy Diamond

Strategy nowadays has become a blanket term which is often used everywhere and there are various frameworks also for analyzing strategic situations. The firm’s objectives and mission stand apart and direct the strategy and not itself formulate the strategy. Similarly the internal environment fortifies and supports the strategy but does not form strategy itself.

A strategy has five elements, providing answers to five questions:

* Arenas: where will we be active?

* Vehicles: how will we get there?

* Differentiators: how will we win in the marketplace?

* Staging: what will be our speed and sequence of moves?

* Economic logic: how will we obtain our returns?” 4

An analysis of all these five elements is required to frame a good strategy for sustained competitive advantage and above average rate of return.

1)  Arenas:This refers to the areas where the firm will be present and should include specific things like product categories, geographic areas, market segments and main technologies, as well as the value-adding stages (e.g., product design, servicing, manufacturing, distribution, selling) the business anticipates to implement.

2)  Vehicles: After deciding the arenas, the strategists has to decide the means to get into specific arenas chosen like the geographic segment, product category etc. These vehicles are extremely important and should not be considered as an after decision implementation detail. The various vehicles available to a firm can be:-

Internal Development Licensing/Franchising Joint Ventures

Acquisitions

3) Differentiators:

Along with the arenas and vehicles, a firm must also specify the way it will win in the marketplace and it will get the customers. The various differentiators can be:

4) Staging:

After the above decisions the firm has to make a decision regarding the speed of execution and the sequence of key steps to be implemented. Such decisions about staging can be affected by a number of factors:

Accessibility to various resources like funding, human resources etc. Urgency to implement the decision at hand.

Credibility: Implementation of certain decisions can help firm gain credibility and attract stakeholders and resources necessary for further decision making.

Pursuit of early wins that is identifying the key decisions which when executed can help firm attain an early advantage.

5)  Economic Logic:

At the core of strategic decision making is how a firm will generate profits and also profits which are above the firm’s cost of capital.

The various economic logic can be:-

*Lower costs through scale advantages

* Lower costs through replication and scope advantages

* Premium price due to unparalleled service

* Premium price due to proprietary product features

1.4 d BCG Matrix (Growth Share Matrix)

One of the first strategic analysis techniques to be developed was by Boston consulting group. The matrix later on came to be known as the BCG matrix. Diversification of a company usually means that a company ends up with multiple product lines and range of products that it deals in. For ease of management purposes, these range of products and product lines are grouped together to form something which is referred to as strategic business unit of a company. The main characteristic of an SBU, is that it is under the umbrella of a conglomerate and therefore there is mobility in terms of resources from one SBU to another. The common pool of resources means that there is always paucity or resources and unlimited demands in terms of the SBU requirements for what they want to achieve. The conglomerate has to divide the limited resources across the SBU in such a manner that good opportunities are exploited and strong threats are overcome and non of the SBUs suffer because of lack of resources. The BCG solves this problem on basis on matching between external and internal performance of a SBU.

The BCG Matrix graphically portrays differences among divisions (of a firm) in terms of relative market share position and industry growth rate. It is used to categorize various business in a firm’s portfolio based on market share and market growth. It consist of 2×2 matrix with market share on horizontal axis and market growth on vertical axis. It has been developed to help in the process of strategic analysis and resource allocation.

STARS

This category of the SBUs refers to the SBUs which enjoy high market shares and a high growth. This means that the companies not only are doing very well in terms of profitability but the industry is also in growth stage of its life cycle. The business unit which are in this category of BCG usually have a very high rate of profitability and the company wants to keep exploiting that rate of profitability . Therefore, this category of BCG includes SBU in which a company is motivated to invest into. Cash generated from these business units is reinvested into the business and further cash is also redirected from cash cows to stars. Usually the business units which fall in this particular category of BCG matrix are in growing stage of their product lifecycle. As demand decreases and additional investments need to be stop, and organization become cash cows.

Question marks

Similarly, this category of SBU is the one where the SBU is experiencing low market share but it is in an industry which is growing at a exponential rate . Therefore if a company can increase the strengths of this SBU and decrease the weaknesses of the SBU the probability that the SBU would be making huge profits become high. It is that this logic that the exporter and in BCG is named as question marks. This refers to SBU’s which have a capacity of becoming either star performers or simply liabilities for the business.

Cash Cows

The third quadrant of BCG matrix refers to SBUs which have enjoyed exceptional success in the market. However, because of external environment reasons like availability of a stronger substitute product or changes in the customer Demand etc the product sales have started stagnating. However, the unit is it is still doing well in terms of profitability but the future of the SBU due to external reasons is glim. Therefore even if the business tries to invest in to these business units the demand is just not there. The customer loyalty that the SBU generated during its star phase is helping it make profits. Therefore, as a policy the profits generated from the business unit are redirected to stars and question marks type of SBUs. Dogs

The fourth and last quadrant is the one where the SBU is neither enjoying market share nor market growth i.e. the company’s portfolio of weaknesses is more than that of its strengths and even if the company is able to turn it around the investment would be to no end because the industry is in declining phase of life cycle. Therefore, as their expected growth is very low, it is advisable to them to move out from that business.

1.4 e General Electric’s Stoplight Matrix

Based on the fundamentals of portfolio analysis another matrix which helps in strategy formulation is referred to as general electric stoplight matrix. The General Electric Company Matrix helps to allocate resources and has two dimension Business Strength which tells how strong is firm compare to its competitors, other is Industry Attractiveness which tell attractiveness and potential of the Market. It is 3×3 matrix with Industry Attractiveness in Vertical axis and Strengths of Business in Horizontal axis.it is similar to BCG matrix, or can say upgraded version of BCG matrix

This matrix gives idea or guide business to weather they have to invest, hold or divest depend upon the attractiveness and strength of businesses. Example when Attractiveness is high and Strength is strong then company needs to invest and if attractiveness is low and strength is weak then company needs to divest.

1.4 f Balance Score Card

Researchers are of the opinion that if a business activity can be expressed in numbers then it can be improved and if you cannot measure it you cannot improve it. This thought was the basis of balance scorecard. Balance score says that “If companies were to improve the management of their intangible assets, they had to integrate the measurement of intangible assets into their management systems.”5

It is a strategic analysis tool that is used in industry, government and any non-profit organization in the word to align business tasks to the vision and strategy adopted by the organization. Dr Robert Kaplan and Dr David Norton6 was the originator of the balance score card as a performance measurement framework which gives a more balanced view to the managers by adding strategic non-financial aspect to traditional financial metric.

The measurement in balance score card generally includes the following category of performance.

Financial performance which deals with thee revenue, earnings, returns on capital, cash flow. Customer value performance which deals with the market share, customer satisfaction measures and customer loyalty.

Internal business process performance which has productivity rates, quality measures and timeliness.

Innovation performance which deals with percentage of revenue from new products, employee suggestions and rate of improvement index.

Employee performance which consists of morale, knowledge, turnover and use of best demonstrated practices

In balance score card we see the organization in four ways

The Learning & Growth Perspective The Business Process Perspective The Customer Perspective

The Financial Perspective And then we develop metrics, collect data and analyze that data.

Source: Adapted from Robert S. Kaplan and David P. Norton, “Using the Balanced Scorecard as a

Strategic Management System,” Harvard Business Review (January-February 1996): 76.

The Learning & Growth Perspective

The BSC retains financial metrics as the ultimate outcome measures for company success, but supplements these with metrics from three additional perspectives – customer, internal process, and learning and growth – that we proposed as the drivers for creating long-term shareholder value. 7This includes employee training and corporate cultural attitudes which relates to individual and corporate self-improvement.

The Business Process Perspective

This deals with the processes of internal business. The metrics in this allows the manager to get the knowledge of the business, how it is going on, is the able to conform the requirements of the customer by their product and services which is their mission. Theses metrics should be designed with the knowledge of processes and unique mission.

The Customer Perspective

The customer focus and its satisfaction are very important in any business. Customer is the leading indicator. Customer satisfaction shows the processes of the business are doing well to meet the need of the customer, if the customer is not satisfied that shows the business need to improve to fulfil the needs of the customer. The metrics of the satisfaction should be developed by analyzing the customer and its needs

The Financial Perspective

Funding data always remain the first priority of the manager and manager will do whatever possible to provide it. The addition financial related data should be added like risk assessment and cost-benefit data so that the emphasis on the financials of the organisation does not leads to the unbalance situation when seen with other perspectives.

One of the important components of BSC is the strategy maps. Strategy Maps are a way of describing the causal relationships between strategic objectives. It is a simple causal chain of strategic objectives and the effects of meeting those objectives for example if employees are better trained in quality management tools it would reduce process cycle times and process defects; this would intrun lead to improved processes and shorter customer lead times, improved on-time delivery, and fewer defects experienced by customers; the quality improvements experienced by customers lead to higher satisfaction, retention, and spending, which drives, ultimately, higher revenues and margins i.e. the financial margins8.

1.5 Summary

Strategic analysis is defined by business world dictionary as the process of developing strategy for a business by researching the business and the environment in which it operates. There are three steps to strategic analysis Industry analysis , Company analysis and Matching the two. Industry analysis is a special tool that facilitates a company’s complete understanding of position with respect to other companies that manufacture and produce same kind of products and services. Gaining the knowledge about other forces in an industry is an important aspect of effective strategic planning. Company analysis or Internal appraisal is examining of internal environment of an organization to assess company’s skills and resources. It identifies the strengths and weaknesses that effect the company’s ability to achieve its goals. Internal appraisal is auditing of internal environment to identify strengths and weaknesses of an organization so as to match and control them to exploit the available opportunities in the industry. The last and the most important stage of strategic management is matching the external and internal environment indicators to formulate strategies for above average rate of return and sustained competitive advantage. There are multiple tools and frameworks which can be used for strategic analysis i.e .SWOT analysis, TOWS analysis, Hambrick model, Balance score card and the classic tools like BCG and GE matrices. The current lesson discuses all of these tools in detail.